INTERNAL AUDIT’S ROLE IN HIGHLY AQUISITIVE ORGANIZATIONS
JUNE 27, 2017
Jeff Hemphill | Central Region Risk Advisory Services Practice Leader Chris Alger | Management Advisory Services Managing Director CPE AND SUPPORT
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2 JEFF HEMPHILL CENTRAL REGION LEADER | RISK ADVISORY SERVICES
Jeff is a leader in BDO’s Risk Advisory Services practice with more than 25 years of public accounting and industry experience including 20 years of risk, governance, and internal controls engagements. His practice emphasis is in risk management, internal audit, Sarbanes-Oxley readiness and compliance, fraud program development, IT audit, and quality assurance for private and publicly held companies. Much of that work involves collaborating with management teams on growth strategies and board of directors’ matters, as well as working with audit committees involving governance and with private equity firms to coordinate strengthening management activities as new requirements are undertaken.
He joined BDO with Big Four experience, previously with KPMG and Deloitte. In PROFESSIONAL AFFILIATIONS addition, Jeff has experience developing and managing compliance programs with NACD responsibility for North America, Europe and Asia. CIA IIA Dallas Chapter Jeff is a frequent, sought-after speaker on advisory matters for professional and University of North Texas Accounting civic audiences. As an active member of the Institute of Internal Auditors, Jeff Department Board remains on the forefront of industry regulations and changes. He serves on many community boards and civic committees. EDUCATION M.S., Accounting, University of North Texas B.S., Accounting, University of North Texas
3 CHRIS ALGER MANAGING DIRECTOR | MANAGEMENT ADVISORY SERVICES
Chris Alger is a Managing Director of our Business Performance Improvement practice, located in the Pittsburgh, PA office of BDO USA. He has more than 30 years of practical solution deployment experience focusing on the planning, design and delivery of growth-oriented, performance improvement, synergy realization solutions as well as focusing on operationalizing business strategies. Mr. Alger commonly works with client leadership who has aggressive growth or performance agendas commonly triggered by marketplace disruptions, by a shift in strategic priorities or by the demands of growth expectations. He is actively working with the BDO Transaction Advisory Services leadership to leverage management consulting skills and PMI experience to deliver PMI planning and support services to our TAS clients geared to mitigating stabilization risk and enhancing “speed to value”. Additionally, Mr. Alger leads efforts around finance, operations and value chain performance improvement linked to integrated planning, forecasting and performance management. EDUCATION M.B.A., Katz Business School, University of Prior to BDO, Mr. Alger was a Management Consulting Partner with Accenture LLP. Pittsburgh Throughout his career, Mr. Alger has worked with medium to large Fortune 1000 M.S., Geology, West Virginia University companies and global multinationals to drive material bottom line business value B.A., Geology and Economics, Ohio Wesleyan and improved returns to shareholders. He has led and managed several small, University medium and large business change teams through the full project lifecycle from due diligence and feasibility to support design and benefits realization efforts. He has provided guidance and coaching to executives seeking to undertake aggressive performance improvement change programs across multiple disciplines.
Mr. Alger provides business advisory and management consulting services to clients across multiple industries.
4 TODAY’S LEARNING OBJECTIVES
At the conclusion of this course, participants will be able to: Discuss the key considerations associated with internal audit’s role in M&A activities; Discuss practical examples of internal audit projects related to acquisitions; and Identify benefits and pitfalls for internal audit in highly acquisitive organizations.
5 INTRODUCTION TO BDO
ABOUT BDO INTERNATIONALLY ABOUT BDO NATIONALLY
Accounting and Audit Accounting and Audit 57% 50% Tax Tax 22% 33% $1.29 Consulting / Advisory $7.6 Consulting / Advisory billion revenues 21% billion revenues 17%
158 1,400+* 67,000+ 60+ 500+ 6,057+ Countries offices Total personnel offices Alliance firm Total personnel locations
* Including exclusive alliances of BDO Member Firms Statistics as of year ended 9/30/16. Statistics as of year ended 6/30/16.
6 OVERVIEW OF RMTAS
COMPLIANCE BDO’s Risk Advisory practice works closely with clients to CORPORATE BUSINESS assist in the management of GOVERNANCE/ PERFORMANCE ORGANIZATION risk and the achievement of IMPROVEMENT DESIGN strategic business objectives through proper internal control systems. STREAMLINE OPERATIONS? WE HELP CLIENTS ACHIEVE Our professionals provide the STRATEGIC BUSINESS value-added risk management OBJECTIVE THROUGH capabilities needed to mitigate ACCOUNTING PROPER INTERNAL CONTROL ENTERPRISE RISK AND BUSINESS SYSTEMS MANAGEMENT & business risk, support business SERVICES INTERNAL AUDIT strategies and continuously improve operational performance.
TECHNOLOGY FRAUD ADVISORY PREVENTION
7 KEY CONSIDERATIONS ASSOCIATED WITH INTERNAL AUDIT’S ROLE IN M&A ACTIVITIES
8 POST MERGER INTEGRATION OVERVIEW
Why is Post Merger Integration important?
Companies rely on mergers and acquisitions (M&A) to build critical mass, expand markets, and acquire new skills and technologies; however, the reality is a majority of today’s mergers will “fail” to achieve desired objectives.
In the past, executive management often assumed business synergies would naturally evolve once the M&A transaction closed; however, opportunity for a M&A failure is greatest after the deal is closed without deliberate focus.
Companies and investors now view M&A integration plans as one of the most important parts of the deal.
9 INTEGRATION – SUCCESS FACTORS
10 INTEGRATION - SOME KEY QUESTIONS •Why this deal? If there are synergies, what hard evidence Strategic indicates they will materialize? What is our integration considerations strategy? What is the definition of success?
•What changes are needed to the current operating Operations structure and logistics following the merger? Will the supply chain be affected?
•As we blend the human resources from the companies, Talent will we retain the right talent for success?
•Is the company’s technology infrastructure capable of Technology supporting the planned merger? How will the acquired company’s technology be treated post-merger? •Will the merger involve a blending of different cultures? What are our plans for resolving conflicts? Will there be a Culture new post-merger culture? How can we ensure all employees thrive? •What are the dashboard components? What elements will Monitoring progress management monitor? How frequently? What metrics will the board use to measure overall success?
*Reference: National Association of Corporate Directors, NACD Blue Ribbon Commission Report on Strategy Development, 2014
11 INTEGRATION - PLANNING CONSIDERATIONS Ensure issue-free operational “Day One” • People: Interim reporting structure, retention & communication plans Day One • Process: Key interim processes transitioned/harmonized (e.g., payroll & Readiness benefits, business development) Short Term • Technology: Email, phone, expenses
Combine with minimal operational disruption Medium Term Medium • People: Robust communication, reinforcement of roles & responsibilities, Transition and align compensation & benefits Stability • Process: Teams rapidly plan & execute back-office integration (programs & Long Term Long operating units addressed later) • Technology: Complete system integration/alignment
Realize full potential of expertise & competencies Strategic “End- • People: Define strategy for combined organization State” • Process: Consolidate program operations, ensure processes & policies Operating support objectives Model • Technology: System standardization & optimization
“First things, first.” Prioritize initiatives by importance & urgency 1212 INTEGRATION – HIGH-LEVEL COMPONENTS ILLUSTRATIVE ACTIVITIES | REPRESENTATIVE TIMING
Strategy/ Planning
PMI Stabilization Phases (First 100 Days)
Integration (Synergies)
13 INTEGRATION – TYPICAL TIMELINE
PMI Metrics and Tracking
PMI PMI Planning Execute pre-announcement tasks Execute Day 1 Tasks Kick Kick off Tracking and reporting off Tracking and reporting
Start detailed PMI PMI performance Target planning tracking involvement as necessary Refine Project plan PMI Process PMI Project plan • Schedule and timelines • Schedule and timelines • Risk plan • Risk plan Reports Reports • Stakeholder plan • Stakeholder plan Updates Updates • Communication plan • Communication plan • Stabilization plan • Initial stabilization plan • Day 1 checklists
Week 1 2 3 4 5 6 7 8 9 10 2017 Announcement Closing/Day 1 Today CLIENT EXAMPLE
14 INTEGRATION – KEY CONSIDERATIONS ALIGN PLAN TO STRATEGY| “MEASURE TWICE, CUT ONCE”
Articulate Strategic Objectives Agility Acquisition Scenario Planning & Alignment
Power Stabilization/Integration Playbook
Detailed Integration Planning • Stabilization Plans • Integration Plan Speed
Serial acquirers, who are committed to an inorganic growth strategy, develop aligned core competencies of acquisition readiness and integration planning and preparedness capability
15 INTEGRATION – KEY CONSIDERATIONS STABILIZE BEFORE YOU INTEGRATE | “FIRST THINGS FIRST”
GOAL Stabilization should be closely Control and minimize the depth and duration Importance of managed/monitored to ensure solid of adverse First 100 Days performance impacts foundation for integration is during stabilizations. established
Plan stabilization early Establish a stabilization war room Establish targets/monitor performance One Plan, Multiple Dimensions
16 Identify the right leader/team
Best leader, not just the available one
Rotational programs build skills
Budget accordingly
Too much is at stake to have leadership and integrators distracted by other mission critical operational and/or strategic issues.
Accountability for results is essential.
17 BDO’S HIGH-LEVEL METHODOLOGY ILLUSTRATIVE ACTIVITIES | REPRESENTATIVE TIMING PHASE 1 PHASE 2a PHASE 2b PHASE 3 PHASE 4-n Value First 100 Days Integration Diagnostic & Integration Due Diligence Execution Support LOI Integration Planning Management Services Strategy Begin with the End In Mind Measure Twice, Cut Once
Deal Pre-close DD & Integration Planning Finalized Post-close Integration Support 2-3 Weeks 5–6 Weeks tbd Review Deal Business Case Finalize Integration Strategy Execute Day 1 Plan Program /Change (Validate Rationale) Define Executive Priorities Communication Plan Management Develop/Confirm Integration Create Inventory/Action Plan Execute Transition Plan Stakeholder Management Strategy & Validate Synergy Priorities, For: Monitor Stability Communication Planning Assumptions Critical Processes Financial Manage/Escalate Issues Resource Retention Conduct High-Spot Critical People Planning Sanction Stabilization Data, Opportunity Review Critical Technology Projects (Swat Teams) Organization Design Operational Interviews (as appropriate) Develop Transition Plan Culture Gap Assessment/ Finance and Accounting Communicate Progress Data & Formalize Communications Alignment HR/Comp/Benefits Finalize Synergy Realization Formalize Day 1-100 Planning Insights/ Information Technology Plan Manage Integration/Synergy & Checklists Procurement Realization Teams Risks Communicate Execution Supply Chain/Distribution Define Synergy Realization Finance Sanction Special Projects Etc. Projects HR/Comp/Benefits Build Risk Assessment Review Deal Rationale Mobilize Teams IT Etc. Establish Prioritized High- Prioritize Opportunities Execute Projects level Road Map Develop Business Case Monitor Performance Planning Develop Integration Roadmap Reassess Business Case First 100 Days Formalize & Communicate Source Integration Work Integration Stream Teams Source Work Stream Teams
18 BDO’S HIGH-LEVEL VALUE DRIVERS SOURCES OF VALUE FALL INTO THREE PRIMARY CATEGORIES
Risk Management/ Today’s Focus Mitigation
Value Revenue Levers Enhancement
Cost/Operating Synergies
19 KEY CONSIDERATIONS ASSOCIATED WITH INTERNAL AUDIT’S ROLE IN M&A ACTIVITIES
Risk management considerations
20 BDO’S RISK APPROACH TO INTEGRATION RISK APPROACH ALIGNS WITH BROADER INTEGRATION METHODOLOGY
Post Acquisition Integration
PHASE 1 PHASE 2a PHASE 2b PHASE 3 PHASE 4-n Value First 100 Days Integration Diagnostic & Integration Due Diligence Execution Support LOI Integration Planning Management Services Strategy Begin with the End In Mind Measure Twice, Cut Once
Deal Finalized
Planning Execution Monitor
Risk Management Integration Assessment
21 BDO’S RISK APPROACH TO INTEGRATION COSO ERM RISK MANAGEMENT FRAMEWORK – FOCUS EXAMPLES
Strategic Operations Reporting Compliance
Reporting Synergies Financial Regulatory Lines
COSO ERM Framework, 2004
Change Policies and Efficiencies Managerial Management Procedures
22 BDO’S RISK APPROACH TO INTEGRATION
BDO’s approach to Post Acquisition Integration is a phased approach which includes a roadmap for the new acquisition’s first 100 days and beyond:
Planning Execution Monitor
Planning Phase Considerations Teams/Committees Tools/Systems Communications Synergies Facilities Stakeholders Skills Standards Governance Culture Leverage Best/Better Practices
23 BDO’S RISK APPROACH TO INTEGRATION
Planning Execution Monitor
The Vision Sets Targets – Risk Mitigation Value Stream
Revenue Enhancement • Expand product line • Attract new customer • Enter new market • Rationalize & strengthen brands • Rationalize/standardize salesforce • Establish processes & disciplines Cost Reduction (Synergies) Integration Structure • Combine overhead – Shared Services • Rationalize assets/portfolio Strategy & Execution • Optimize supply chain • Leverage spend base Plans Priorities • Optimize debt/equity ratios • Leverage/share best practices
Integration GoalsIntegration Risk Mitigation • Diversify revenue sources • Competitive pre-emption • Extend life cycles (Product/Technology)• Sourcing diversity • Supply chain diversification • Regulatory risk management
Minimum Stretch Requirements Aspirations Goals
24 BDO’S RISK APPROACH TO INTEGRATION
Planning Execution Monitor
Evaluate major objectives
Integrate Risk Mitigation Communications Into Review the Broader Communication Messaging communications Strategy & Plans plan
Timely Schedule of Feedback and Communications Resolution
25 BDO’S RISK APPROACH TO INTEGRATION
BDO’s approach to Post Merger Integration is a phased approach which includes a roadmap for the new acquisition’s first 100 days and beyond:
Planning Execution Monitor
Execution Phase Business Considerations Key Business Cycles Monitoring / KPI Customers Continuity Business Continuity Procedural Consistency Vendors Management Employee Retention Brand Rationalization Asset Rationalization Policy Alignment Skill Drain Public Relations
26 BDO’S RISK APPROACH TO INTEGRATION
Planning Execution Monitor
Integration Execution Considerations
27 BDO’S RISK APPROACH TO INTEGRATION BDO’s approach to Post Merger Integration is a phased approach which includes a roadmap for the new acquisition’s first 100 days and beyond:
Planning Execution Monitor
Assessment Phase Considerations Support / Monitoring Change Management Reporting Resource Retention Process Improvement Results
28 BDO’S RISK APPROACH TO INTEGRATION
Planning Execution Monitor
Reassess the execution of the plan and consider process improvement opportunities Execution Opportunities Results
Process Improvement
29 PRACTICAL EXAMPLES OF INTERNAL AUDIT PROJECTS RELATED TO ACQUISITIONS
30 ACQUISITION PROJECTS FOR INTERNAL AUDIT
Acquired/Target Risk Assessment – Strategy, Operations, Reporting, Compliance Acquired/Target Controls Assessment Acquired/Target Governance Assessment Acquired/Target IT Assessment Facilitate risk based planning of acquisition with business units Audit organization target identification process Audit Due Diligence Process Audit the integration process Post Acquisition Review / Merger Objectives Assessment Evaluate Project Management, Planning & Escalation Evaluate assumptions for synergies
31 BENEFITS AND PITFALLS FOR INTERNAL AUDIT IN HIGHLY ACQUISITIVE ORGANIZATIONS
32 RECAP: BE AWARE OF INTEGRATION PITFALLS
Treating all acquisitions alike with no tailored strategy Not planning the integration early enough Put too much emphasis on being fast and keeping the deal a secret Not focusing enough time on employees and culture alignment while over focusing on external media and investment community Not considering Risk Mitigation a source of business value Not tailoring communication to meet the various audiences Understaffing integration effort (insufficient leadership) Discounting the role of professional communicators Not performing cultural or system audits; instead relying only on “due diligence” output Not getting the right resources to the table at the right time
33 INTEGRATION BENEFITS: INTERNAL AUDIT
Focus on merger and acquisition objectives yields a strategic assessment of synergy opportunities Internal Audit offers an independent and objective lens by which to evaluate acquisition effectiveness and efficiency Internal Audit is uniquely qualified to assess and consult on critical aspects of acquisitions: • Risk Management • Internal Control • Corporate Governance • Corporate Culture • Systems and IT Infrastructure • Human Capital Integration
34 QUESTIONS
Jeff Hemphill Chris Alger [email protected] [email protected] 214-665-0649 412-281-4323
35 COMING SOON…
Internal Audit Webinar Series, Course #4: September 26, 2017 Harnessing the Power of Data Analytics and Continuous Monitoring
www.bdo.com/global-risk-landscape-2017
36 CONCLUSION THANK YOU FOR YOUR PARTICIPATION!
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